Underwriters Start to Feel Woes of Small Junk Bonds

Junk bond underwriters affiliated with U.S. banks led 32% of the new issues in the first quarter, about the same as a year ago. But there was a sharp divergence between banking companies that cater to big-cap companies and those that focus on small or mid-cap clients.

"We are seeing a tiering in market share, with a few larger participants separated from everyone else," said Randolph Barker, Salomon Smith Barney's co-head of global debt capital markets and syndicate.

Indeed, Salomon's market share jumped to 16.4% last quarter, from 12.1% a year earlier. That boosted the bulge-bracket firm up one notch, to No. 2.

Mr. Barker said Salomon's merger with the Travelers unit Smith Barney in 1997, followed by Travelers' marriage to Citicorp last fall, helped to drive the firm's share higher. "This has given us market clout and an increased presence," he said.

On the other hand, the market share of BT Alex. Brown Inc.-which has historically focused on smaller, highly leveraged credits-plummeted to 2.4% last quarter, from a 7.1% share a year earlier. This brought the Bankers Trust Corp. unit down four notches to rank No. 10.

"Much like the equity market, high-yield is two-tier now, with bigger, more liquid names driving the market," said Arthur Penn, BT Alex. Brown's head of global debt capital markets. "The smaller deals have had problems in some cases."

Investors have turned a cold shoulder to less liquid and lower-rated issues since the junk bond market swooned last fall. They bought $27.2 billion of new junk bonds in the first quarter-a healthy sum, by historical standards. But that was about 40% less than a year earlier.

And even that was concentrated in a handful of larger issues. For instance, about a third of Chase Manhattan Corp.'s volume last quarter was for one customer: Charter Communications International, a St. Louis cable company backed by Microsoft billionaire Paul Allen.

Charter's $3 billion junk issue was the second-largest ever, after the $6.1 billion deal that financed the RJR Nabisco buyout in 1989.

Chase - with Goldman, Sachs & Co. and Donaldson, Lufkin & Jenrette-co- led a tranche of the bond, which netted Charter $556 million. Goldman was sole lead on the other two parts.

"This is clearly one of the most widely held deals on the market," said Chris Lineman, Chase's co-head of high-yield capital markets. "Cable is one of the hottest sectors now, and almost everyone wanted this credit."

Mr. Lineman said there was heavy negotiation with about 200 investors before the pricing and structure were set. He said liquidity is one of the most desirable qualities in today's junk bond market.

Overall, Chase Manhattan Corp. led deals worth $1.6 billion last quarter, or 5.8% of the market, and ranked No. 6 - up from No. 7 a year earlier.

"We would not shy away from a small deal. But we would explain to the issuer that smaller deals are demanding a pricing premium," Mr. Lineman said.

J.P. Morgan & Co.'s junk bond volume more than doubled last quarter to 4.4%, up from 2.1% a year earlier. The New York bank moved up four notches from a year earlier, to No. 9. Morgan has been building its leveraged finance effort since last year, according to Kenneth Lang, the bank's co- head of high-yield capital markets.

"We have bolstered our high-yield capabilities both in origination and distribution, and focused more on financial sponsors," Mr. Lang said.

Like Chase, a substantial portion of Morgan's market share was from one large deal. Morgan was sole lead on a $650 million junk bond issue for the acquisition of Packaging Corp. of America by the Chicago buyout shop Madison Dearborn.